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Must-know: JANA Partners discloses activist position in Civeo

Part 5
Must-know: JANA Partners discloses activist position in Civeo (Part 5 of 6)

Must-know: Why Civeo’s Australian occupancy rates fell

Civeo’s Australian occupancy rates fell

Civeo (CVEO), in which JANA Partners disclosed an activist position earlier this month, recently reported its 1Q14 results. Civeo was spun-off from Oil States International (OIS) earlier last month.

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Its 1Q14 revenue and profits were below expectations. Net income for 1Q14 was $36.2 million compared to a net income of $63.8 million for the 1Q13. The company generated revenues of $252.8 million and earnings before interest, taxes, depreciation, and amortization (or EBITDA) of $92.3 million during the 1Q14, down from revenues of $294.5 million and EBITDA of $131.9 million reported in the 1Q13. Revenues and EBITDA were down year-over-year (or YoY) due to lower occupancy levels in both its Australian villages and Canadian lodges and lower contracted Canadian lodge rates. It also saw an unfavorable impact on consolidated results of a stronger U.S. dollar compared to the Australian and Canadian dollars.

Revenue fell across all of its three segments namely Canada, Australia, and the U.S. for 1Q14. Revenue per available room (or RevPAR) fell 20% and 22% YoY for Canada and Australia, respectively. Occupancy rates at its Canadian lodges fell 2% YoY to 90% in 1Q14. For Australian villages, the rates fell to 76% from 84% in 1Q13, with the management adding that “lower occupancy in its Australian villages was due to weak met coal prices.”

Civeo’s Australian operations are concentrated in the Bowen Basin, with met coal pricing and growth in production influenced by levels of global steel production. Factors such as low pricing, additional carbon and mining taxes on Australian customers, and several years of cost inflation in early 2013 caused several of Civeo’s customers to delay or reduce their growth plans. This impacted Civeo’s ability to improve room count and maintain or expand occupancy levels. Civeo noted that one of its customers also had to renegotiate contracts to reduce their forward room commitments in return for termination compensation beginning in March, 2014. According to a May presentation, Civeo’s customers in Australia include BHP Billiton (BHP), Vale (VALE), Whitehaven Coal (or WHITF), Peabody Energy (BITU), and Anglo American’s Anglo Coal.

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In its 10Q, Civeo said that since Chinese steel production has been growing at a slower rate than it experienced in 2010 and early 2011, Chinese demand for imported steel inputs such as met coal and iron ore continued to decrease during the 1Q14 compared to the 1Q13. As a result, spot met coal prices decreased materially from over $160 per metric ton at the beginning of 2013 to approximately $113 per metric ton at the end of the 1Q14. Depressed met coal prices led to the implementation of cost control measures by customers, some coal mine closures, and delays in the start-up of new coal mining projects in Australia.

A continued depressed met coal price will impact customers’ future capital spending programs, Civeo said. However, steel consumption per capita in China is less than one-third of the amount installed in the U.S. economy. This suggests a favorable outlook for Chinese steel production and met coal demand over a longer time horizon. Civeo expects the macro metallurgical coal environment to improve after period of soft prices and reduced investment.

BREE forecasts lower metallurgical coal prices

Australia’s Bureau of Resource and Energy Economics (BREE) said in a quarterly update that metallurgical coal spot prices declined steadily over the first half of 2014 underpinned by weaker demand growth and increased supply from the U.S., China, Canada, Russia, and Australia. Benchmark contract prices for high-quality metallurgical coal delivered in the June quarter 2014 settled at $120 a ton—down from $143 a ton in the March quarter. Contract prices are expected to decrease further over the course of 2014 in response to continued surplus supply. For 2014 as a whole, contract prices are forecast to average around $123 a ton, and reflect lower spot prices in the second half of 2014. Average contract prices for 2015 are forecast to decline by 1% to $121 a ton.

BREE said that consumption of metallurgical coal is forecast to continue to increase in 2015 in line with forecast higher steel production, particularly in China. However, production is forecast to increase at a faster rate and continue to contribute to softness in metallurgical coal prices.

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